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This under-represents the risks of bond investment. While it's true that the credit risk of treasuries is incredibly low, interest rate and inflation risk need

This under-represents the risks of bond investment. While it's true that the credit risk of treasuries is incredibly low, interest rate and inflation risk needs to be addressed more seriously than it is in this post. In today's market, it's easy to think of holding a bond until maturity under adverse interest rate movements as "not losing money". This is a false model. For example, a ten year treasury purchased at issue in mid-2016 is paying less than the current rate of inflation. When interest rates increase, bond holders lose money. Holding the bond just changes the accounting (and exposure to future swings). Diversification of bond duration is important in terms of risk management and not just cash flow concerns. Prudent portfolios include equities as well as debt. While I'm currently in tech, I worked on Wall Street for years (both the trading business and IT).

jterenzio 8y ago
Thanks for the comment. I was trying to make clear this is a short-term strategy in a rising rate environment where you eventually want the principal back and don't want to take much risk. In accounts with longer term goals like retirement accounts you'd probably mix equities and more diversified bond funds. Is there a way you think the strategy and when it's appropriate could be made more clear?
- snikeris 8y ago
  > Is there a way you think the strategy and when it's appropriate could be made more clear? I think it's a useful strategy as part of a diversivied portfolio. As the GP mentioned: > Prudent portfolios include equities as well as debt. Your guide to building a treasury ladder would be useful to someone implementing Harry Browne's Permanent Portfolio concept, which holds 50% of its assets in US Treasuries. However, building a diversified portfolio is likely outside the scope of your guide.
- valenciarose 8y ago
  It's a good article and the strategy is appropriate as part of a more diverse portfolio. My point wasn't that the article was bad, but that holding till maturity only gives the illusion of bypassing interest rate risk. "The only real risk to principal is being locked in to a rate that's lower than inflation for an extended period."
whitepoplar 8y ago
So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.
- ThrustVectoring 8y ago
  Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst result is definitely worse for stocks compared to bonds over a one-year timeframe. But, the advantage of a better compound annual growth rate means that as you add more and more time to your investment timeframe, worst-case results for stocks get better compared to bonds. IIRC, the crossover point is very roughly 20 years out - at this point, the risk of stock corrections has been completely absorbed by having superior expected returns.
  - yasp 8y ago
    Tell that to the people that invested in the Nikkei in 1989.
    - ThrustVectoring 8y ago
      Global market-cap weighted equity investment has done fine since 1989. And anyhow, Japan's lost decade is more of a central bank policy failure than anything else, and one that is unlikely to be repeated. The pre-Soviet Russian stock market is probably a better example.
      - marvin 8y ago
        How did the Russian stock market do? I'm curious and haven't heard this discussed before.
jldugger 8y ago
> inflation risk This is somewhat mitigated by TIPS. > interest rate risk At least personally, I'm reading article as an alternative for a subportion of my portfolio, where the options are basically CD ladders and savings accounts. Which have roughly the same interest rate risk as bonds of equal duration. The more interesting question from this perspective is comparing interest rate risk versus the premium you're earning. Ally savings' APR is at like 1.8, their 'no penalty' CDs are at 1.9, and 1 year treasuries are at 2.5. How far would rates have to go up before the risk outweighs reward, etc.

jterenzio 8y ago

Thanks for the comment. I was trying to make clear this is a short-term strategy in a rising rate environment where you eventually want the principal back and don't want to take much risk. In accounts with longer term goals like retirement accounts you'd probably mix equities and more diversified bond funds. Is there a way you think the strategy and when it's appropriate could be made more clear?

snikeris 8y ago
> Is there a way you think the strategy and when it's appropriate could be made more clear? I think it's a useful strategy as part of a diversivied portfolio. As the GP mentioned: > Prudent portfolios include equities as well as debt. Your guide to building a treasury ladder would be useful to someone implementing Harry Browne's Permanent Portfolio concept, which holds 50% of its assets in US Treasuries. However, building a diversified portfolio is likely outside the scope of your guide.
valenciarose 8y ago
It's a good article and the strategy is appropriate as part of a more diverse portfolio. My point wasn't that the article was bad, but that holding till maturity only gives the illusion of bypassing interest rate risk. "The only real risk to principal is being locked in to a rate that's lower than inflation for an extended period."

whitepoplar 8y ago

So buy TIPS? But the elephant in the room is that inflation isn't the same for everyone. It's calculated based on a basic basket of goods, but if you're high income, it may not replicate your spending habits. Private school isn't factored into the CPI.

ThrustVectoring 8y ago
Over a long timeframe, the investment with the lowest risk of underperforming against inflation is broad-market equity index funds. Bear markets and corrections happen, sure, but the nigh-inevitable performance during bull markets more than covers for that. Over something like 30 years, the only question is whether your investment will outperform inflation or massively outperform it. Like, the 5th percentile worst result is definitely worse for stocks compared to bonds over a one-year timeframe. But, the advantage of a better compound annual growth rate means that as you add more and more time to your investment timeframe, worst-case results for stocks get better compared to bonds. IIRC, the crossover point is very roughly 20 years out - at this point, the risk of stock corrections has been completely absorbed by having superior expected returns.
- yasp 8y ago
  Tell that to the people that invested in the Nikkei in 1989.
  - ThrustVectoring 8y ago
    Global market-cap weighted equity investment has done fine since 1989. And anyhow, Japan's lost decade is more of a central bank policy failure than anything else, and one that is unlikely to be repeated. The pre-Soviet Russian stock market is probably a better example.
    - marvin 8y ago
      How did the Russian stock market do? I'm curious and haven't heard this discussed before.

jldugger 8y ago

> inflation risk This is somewhat mitigated by TIPS. > interest rate risk At least personally, I'm reading article as an alternative for a subportion of my portfolio, where the options are basically CD ladders and savings accounts. Which have roughly the same interest rate risk as bonds of equal duration. The more interesting question from this perspective is comparing interest rate risk versus the premium you're earning. Ally savings' APR is at like 1.8, their 'no penalty' CDs are at 1.9, and 1 year treasuries are at 2.5. How far would rates have to go up before the risk outweighs reward, etc.